A Sustainable Country Calls for a Sustainable Finance Policy

Posted on 27 May 2017

In Malaysia, the palm oil industry is the biggest agriculture commodity and we currently account for 39% of world palm oil production and 44% of world exports. In 2015, Malaysia’s palm oil production occupied a land area of 4.8 million hectares, which is about 14.5% of Malaysia’s total land area, and about 64% of nation’s agricultural land.

The Global Footprint Network, established in 1990 by researchers, estimates that we are currently using the resources of 1.6 planets to provide the goods and services we consume each year. If we continuously consume exceeding the Earth’s limits, we risk causing permanent damage to our future, be it on land or in the seas.

In response to the crisis of unsustainable environmental practices, many businesses and financiers around the world are changing their practices. Many organizations have realized the long term survival of their businesses depends on the environment as much as any other community.

As we celebrated World Biodiversity Day recently, let’s take a moment to highlight the role of finance as the key leverage for change in sustainability. How does the financial sector help in tackling some of the most pressing environmental and climate issues?

“Sustainable finance” is defined by the Swiss Sustainable Finance as “any form of financial service integrating environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large. It has become a growing concept embedded within financial and government circles in many parts of the world.

A sustainable finance report in 2015 by WWF, entitled ‘Sustainable Finance in Singapore, Indonesia and Malaysia: A Review of Financiers’ ESG Practices, Disclosure Standards and Regulations’, illustrated that environmental and social issues are increasingly posing risks to the economic growth and social stability across Asia. Therefore, ESG has become important components to financiers and investors to avoid unnecessary risks.

At present, especially in Malaysia, the mainstream financial sector does not sufficiently manage ESG risks or incentivise sustainability improvements in key commodity industries, such as the palm oil sector. The finance sector ends up fuelling resource conversion that does not take into account limits on our natural resources and the livelihoods that depend on these resources.

The 2016 Asian Fast Moving Consumer Goods (FMCG): A Sustainability Guide for Financiers and Companies by WWF estimated that the food, beverage and tobacco industry in Asia will grow by 9% per annum from 2015, and that by 2018, Asia will account for 60% of global consumer expenditure in this category. Consumer spending on household and personal care goods in Asia will also rise by an average of 8.5% per year, to reach USD730 billion by 2018.

The growth and magnitude of consumer spending in Asia translates to increased supply for FMCG, which leads to an increased demand for raw materials and commodities, such as palm oil. However, companies risk serious environmental and social impacts over the coming years if their own and their supply chains’ business practices are not well-managed, especially those relating to the commodities which are high in demand. In view of this, the Sustainability Guide called for financiers of Asian FMCG companies to assess their portfolio companies, banking clients and potential new investments, and link costs and access to capital to more sustainable practices.

In Malaysia, the palm oil industry is the biggest agriculture commodity and we currently account for 39% of world palm oil production and 44% of world exports. In 2015, Malaysia’s palm oil production occupied a land area of 4.8 million hectares, which is about 14.5% of Malaysia’s total land area, and about 64% of nation’s agricultural land.

Given the importance of the palm oil sector to Malaysia’s economy, there is a crucial role for banks and investors in Malaysia to play. They need to engage with their clients and portfolio companies on financial and non-financial risk and opportunities, shifting capital flows to more sustainable activities and creating new products which have ESG-related features.

Due to this growing concern and as part of its Market Transformation Initiative (MTI), WWF-Malaysia, in a joint effort with Bursa Malaysia, organized a Palm Oil Masterclass to share key sustainability issues within the agriculture sector, in particular palm oil. MTI is a global initiative by WWF to transform industries / businesses into producing goods and services without damaging natural ecosystems.

Through multi-stakeholder engagements, corporate engagements and sustainable financing, MTI Malaysia works to mobilize action and support from producers of key commodities, suppliers, investors and regulators in the global transition towards a sustainable future. By working with and influencing the major companies which control 70% of FMCG in the market to demand higher production standards, MTI aims to improve the production of commodities that affect forests, freshwater, oceans and global climate.

The Palm Oil Masterclass was a one-day event which gathered guest speakers from the international banks, institutional investors and palm oil companies. Valuable insights were shared on how the finance sector can contribute to no deforestation and emission reductions, and how integrating ESG safeguards into client / transaction approval and investment processes can reduce risks and increase growth opportunities in portfolio companies.

Attended by over 40 participants, the Masterclass was WWF-Malaysia’s first of many more upcoming efforts to provide a sharing opportunity on practical examples for local financial institutions to understand how their peers are responding to ESG risks and incentivizing sustainable practices.

In Malaysia, the palm oil industry is the biggest agriculture commodity and we currently account for 39% of world palm oil production and 44% of world exports. In 2015, Malaysia’s palm oil production occupied a land area of 4.8 million hectares, which is about 14.5% of Malaysia’s total land area, and about 64% of nation’s agricultural land.

The Palm Oil Masterclass was a one-day event which gathered guest speakers from the international banks, institutional investors and palm oil companies. Valuable insights were shared on how the finance sector can contribute to no deforestation and emission reductions, and how integrating ESG safeguards into client / transaction approval and investment processes can reduce risks and increase growth opportunities in portfolio companies.

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